Written by Paras Anand, CIO of Artemis

Santa may have brought some nice presents down the chimney with him last month, but he did little for shareholders. The famous Santa rally – where cheery markets see a pleasing December uptick – did not happen. But should investors get depressed about this? 

The S&P 500 was down 2.75% for the month; the FTSE 100 down 1.65% – not so much a Santa rally as Dry December! Abstemiousness normally follows a period of excess, and maybe this is justified. We had had our party earlier in the year. 

In aggregate, global equity markets posted solid gains over the course of 2024 (although that hides a mixed bag of results). The big driver was the US – up 24%. Asian markets also showed a healthy return (with the Japanese Nikkei up nearly 20%, for example), buoyed by better global growth. 

 
 

The UK tracked upwards over the course of the year. When you count dividends, the returns were perfectly acceptable. The FTSE 100 total return index was up nearly 10%. Perhaps the surprise, given the dreadful newsflow from Germany is the Dax, which was up nearly 19%. 

While everyone loves a Santa rally, events last month are a useful reminder to investors that second-guessing the near-term overall market direction is a largely fruitless endeavour. 

The year-end sell-off in the US, which undermined all the progress made in the first two weeks of December, highlights the increased acceptance that the post-Covid inflation wave is unlikely to be a one-off. It is difficult to interpret what effect Trump’s policies will have in the US. Most of us believe they will drive inflation rather than suppress it, but beyond that the picture is unclear – not helped by the fact that we cannot know which of his promises and threats he will actually keep. 

So where do I see the best opportunities in 2025? 

 
 

Generally, I think the coming year will be shaped by fewer clear trends, more volatility and far less cohesion in economic strategies – either within regions or across them. The good news is that a wealth of opportunities remains at the security level. And I think that’s where the best returns are likely to be generated. This is good news for active investors. These are the sorts of markets where stock-picking pays. 

Overall market weakness and volatility can be a gift to the alert and nimble investor who has done their research. It opens up the opportunity to buy great shares at discount prices. And that can make a big difference to returns over time. 

The US looks like a middle distance runner who has sprinted the first two laps. Powered by the incredible performance of the Magnificent Seven, US large caps have established a big lead over the rest of the world in the past couple of years. But it means passive investors are likely to now have a very high concentration of Magnificent Seven stocks in their portfolio and a big overweight to US large caps as a consequence. 2025 may be the time when some of the other runners close the gap. 

I think smaller companies look better placed to generate strong returns this year. Long-short US strategies should have an edge in generating extra return to compensate for any slowdown. 

 
 

Looking elsewhere, I think China shows promise. For some time it has been viewed as uninvestable, but that is changing. The prospect of stimulus packages will help. And should hopefully counterbalance the impact of Trump’s tariffs, which may not be as bad as he threatens. The US represents only 14.4% of the Chinese export market now, compared with 19% in 2017. China is much more self-sufficient today. 

Ongoing infrastructure investment in the US (I don’t see Trump stopping this – it is needed too much), coupled with investment in South East Asia could lift commodity prices. Fiscal stimulus in the US could see the dollar under pressure. All this bodes well for wider emerging markets (though stock selection will still be important – in P/E terms India in aggregate is more expensive than the US at the moment). 

Closer to home, little in the data or the UK government’s stated economic strategy suggests a decisive trend one way or another for 2025. But share prices did not overextend themselves last year so there is plenty in the tank for positive returns in 2025 and 2026. 

Turning to Europe, I would argue that the safest way to navigate the region is likely to be through value investing. 

In fixed income active high-yield looks attractive for skilled managers. And uncertainty around the direction of inflation makes short-dated strategies attractive to those building portfolios and looking for some risk mitigation. 

Finally, portfolio planners may be feeling a strong sense of FOMO around private markets at the moment. Fear of missing out is not an excuse for jumping in! I expected private markets to struggle in 2024. They did not. But markets will always make a mockery of anyone trying to time them. Ultimately sense prevails and will prevail. 

Inflationary pressures are not subsiding. That means higher interest rates for longer. That means problems for those carrying debt. And private markets are carrying a lot of debt. I believe the sector has only been able to flourish so long because valuations are opaque. 

Too many people have come to see private markets as a diversifier in portfolios, which is nonsense. A privately-owned supermarket faces the same economic pressures as publicly listed Tesco. Arguably tougher because of the need to service the debt the owners used to buy it. This could be the year investors start to interrogate private equity valuations more thoroughly. It could be painful for holders. 

So, wise investors with a long-term perspective will not be getting too hung up on what Santa did for the markets last month. It is not a portent of what will happen in the year ahead but it may leave more headroom for gains in 2025. 

Related Articles

Sign up to the IFA Newsletter

Please enable JavaScript in your browser to complete this form.
Name

Trending Articles


IFA Talk logo

IFA Talk is our flagship podcast, that fits perfectly into your busy life, bringing the latest insight, analysis, news and interviews to you, wherever you are.

IFA Talk Podcast – listen to the latest episode